The Kerry-Lieberman Scheme for Carbon Rationing

The American Power Act will raise energy prices, reduce incomes, cut jobs, and do precious little about climate change.

Last week, Sen. John Kerry (D-Mass.) and Sen. Joe Lieberman (I-Conn.) introduced a discussion draft of their American Power Act, which aims to address the problem of man-made global warming by radically transforming how Americans produce and use energy. This transformation would be accomplished by chiefly rationing carbon dioxide emissions produced from burning fossil fuels like coal, natural gas, and oil. Under the cap-and-trade scheme set up by the bill, the federal government would issue ration coupons equal to the annual total amount of carbon dioxide that American manufacturers, utilities, and the transport sector are allowed to emit. Reduction targets are based on the amount emitted in 2005. Under the bill, Americans would be required to emit 4.5 percent less greenhouse gases by 2013; 17 percent by 2020; 42 percent by 2030; and 83 percent by 2050.

So what would the effect of Kerry-Lieberman be on energy prices, jobs, and the climate?

Energy Prices & Incomes

Increases in the price of fossil fuels are built into the bill. In fact, they're the whole point. These higher prices are supposed to drive consumers away from currently cheap high-carbon fuels toward pricier low-carbon fuel sources like wind, solar, and nuclear. In addition, higher fossil fuel prices are supposed to encourage conservation and spur innovation to bring down the costs of low-carbon energy sources.

A 2009 study by the Massachusetts Institute of Technology's Joint Program on the Science and Policy of Climate Change looked at what would happen to energy prices and incomes under the very similar American Climate and Energy Security Act, which was passed by the House of Representatives last year. The MIT study projected that the cost for a carbon dioxide ration coupon would rise from $21 per ton in 2015 to $84 per ton in 2050. Consequently the price of coal would rise from $30 per ton today to more than $200 per ton in 2050 and the price of electricity would rise from $0.13 per kilowatt-hour (kWh) to $0.20 per kWh in 2050.

In the MIT scenario oil and natural gas prices do not greatly increase over the projected baseline since their growing scarcity is assumed to dominate future prices. The MIT study projected that implementing carbon rationing would lower GDP by 1.4 percent by 2050 and cost $745 per capita by 2020, rising to $3,160 per capita in 2050. A 2009 Congressional Budget Office (CBO) report, The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions, predicted that implementing carbon rationing "would reduce gross domestic product (GDP) below what it would otherwise have been—by roughly ¼ percent to ¾ percent in 2020 and by between 1 percent and 3½ percent in 2050."

The global consulting firm, Charles River Associates (CRA) in a 2009 study commissioned by the National Black Chamber of Commerce projected that carbon rationing similar to that proposed in the Kerry-Lieberman bill would boost electricity prices by 7.3 percent (1.1 cents per kWh) relative to baseline levels in 2015, by 22 percent (2.8 cents per kWh) in 2030 and by 45 percent (6.1 cents per kWh) in 2050. These increases are in line with the MIT projections. Gasoline prices are estimated to rise over what they would otherwise be by 12 cents per gallon in 2015; 23 cents per gallon in 2030; and 59 cents per gallon in 2050. The CRA study estimated that carbon rationing would decrease GDP by 1.5 percent by 2050. The earnings of an average worker who remains employed would be approximately $170 less by 2015, $390 less by 2030, and $960 less by 2050, than if there were no carbon rationing.

Jobs

When the bill was made public last week, Kerry declared that enacting it would "help us create nearly 2 million new jobs." But the CRA study estimated "a net reduction in U.S. employment of 2.3 million to 2.7 million jobs in each year of the policy through 2030. These reductions are net of substantial gains in 'green jobs.'" Even a Congressional Budget Office (CBO) report, How Policies to Reduce Greenhouse-Gas Emissions Could Affect Employment, released on May 5, 2010, concluded "that total employment during the next five decades would be slightly lower than would be the case in the absence" of policies designed to reduce greenhouse gases. In other words, Kerry-Lieberman is not a full employment scheme. It "creates" some jobs, but only at the expense of destroying more.

Climate

Perhaps reducing the size of the economy, lowering incomes, and boosting unemployment would be worth it if carbon rationing spares us from the deleterious effects of man-made global warming. But in that regard as well, a preliminary analysis by climate scientist Chip Knappenberger is worrisome. Knappenberger, who has long been skeptical of projections of catastrophic global warming, calculates the impact of Kerry-Lieberman carbon rationing, assuming that developing countries decline to make similar reductions. The refusal by big developing nations like China, India, and Brazil at the Copenhagen climate change conference last December to commit to binding greenhouse gas reduction targets suggests that Knappenberger's scenario is not unreasonable.

Implementing Kerry-Lieberman without international cooperation would reduce global average temperatures by 0.077°F in 2050 and 0.2°F in 2100 from what they would have been without carbon rationing. Sea levels would be less than half an inch lower in 2100 than they are projected to be. "In other words, by century's end, reducing U.S. greenhouse gas emissions by 83 percent will only result in global temperatures being one-fifth of one degree Fahrenheit less than they would otherwise be," writes Knappenberger. "That is a scientifically meaningless reduction."

Bottom Line

Unfortunately, estimates of the damage that climate change might cause vary considerably, largely along ideological lines. The alarmist 2006 Stern Review suggested that worst case climate change damages could reduce global GDP by between 5 and 20 percent below what it would otherwise be in 2200. On the other hand, Yale University environmental economist Robert Mendelsohn concludes that losses due to man-made warming would more likely be around 0.2 percent by 2100.

Seeking a more middle-of-the-road—but not necessarily more accurate estimate—another CBO report, Potential Impacts of Climate Change in the United States, published in September 2009, noted, "Despite the wide variety of projected impacts of climate change over the course of the 21st century, published estimates of the economic costs of direct impacts in the United States tend to be small." The CBO report added that even a "relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7 degrees Fahrenheit (F) by 2100."

It's sobering to compare this pessimistic 3 percent GDP loss as a result of climate change by 2100 to the CBO's projected loss of up to 3.5 percent of GDP due to carbon rationing by 2050, five decades earlier. Unless carbon rationing is designed and implemented perfectly, the losses incurred from government policies that aim to combat climate change will easily outweigh the losses that could result from climate change. The Kerry-Lieberman carbon rationing scheme is far from perfect.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is available from Prometheus Books.